Editorial: Economy runs subprime gauntlet

Stronger-than-expected economic growth in the second quarter of this year and an upward nudge for the full-year economic growth forecast offered the public a rare glimpse of good news last week following a slew of worrisome reports about the US subprime mortgage crisis. The pause to catch our breath has been welcome, but no one should be so optimistic as to believe that the worst is now over.

As the breadth of the subprime mortgage problem has only started to emerge, and the ongoing ramifications on the worldwide financial market will continue to develop over the coming weeks or even months, public confidence and consumer sales are not out of the woods yet.

As long as the subprime mortgage problems persist, the global economy is not expected to grow quickly. Taiwan -- where exports constitute more than 70 percent of GDP -- will likely be impacted negatively.

On Thursday, the Directorate General of Budget, Accounting and Statistics said the nation's economy grew 5.07 percent annually in the second quarter.

It was the highest growth in the last six consecutive quarters and the bureau attributed the strong growth to a higher-than-expected increase in private investment -- which grew 12.5 percent in the second quarter compared to an earlier forecast of 2.8 percent growth.

With expectations of stable export growth and recovering domestic consumption in the second half of the year, the government raised its GDP growth forecast to 4.58 percent this year, which is higher than the forecast of 4.38 percent it made in May.

The bureau said it was not pessimistic about the subprime crisis as the disclosed losses by domestic institutions have been rather limited. Such optimism will be put to the test in the fourth quarter, as the nation will see whether the traditionally high season for electronics and information technology products will be impacted by the slowdown in US consumer sales.

For one thing, the factors that were used to formulate the government's latest GDP statistics predated the US subprime mortgage crisis. As Taiwan's economy has a relatively stronger link with US consumption than other Asian economies, Goldman Sachs predicted that a one-percentage point drop in US consumer sales would result in a 1.1 percent decline in Taiwan's GDP growth.

Lehman Brothers also said the US subprime issue would pose a stress test for Taiwan's economy through next year.

Meanwhile, private consumption showed a steady increase of 2.6 percent in the second quarter of the year, compared to a rise of 2.1 percent in the previous quarter and 1.3 percent a year earlier.

But given a slow increase in household income -- which was up 1.6 percent last year from a year earlier and a mere 0.1 percent growth in average monthly pay per employee in the past seven years -- it is hard to foresee robust consumption growth in the coming quarters, even though the government projected at 3.7 percent increase in the second half of the year and 3 percent growth for the year.

Because domestic consumption is still not strong enough to support the economy and the nation remains vulnerable to a sharp slowdowns in global demand, the public and the government should not underestimate the uncertainties in the global market.

The government should remain vigilant over the potential downside risks to Taiwan's economy generated by the subprime mortgage issue, and be prepared to adopt the appropriate approaches if they materialize. Such measures may include improving the employment rate at home to boost domestic consumption or increasing exports to markets outside of the US.